Wheat in strong demand

BROOKINGS, S.D. -- Before the release of the World Agricultural Supply and Demand Estimates report release July 11, market analysts expected ending stocks for 2012 to 2013 corn to be adjusted lower, and market sentiment expected both 2013 to 2014 corn and wheat ending stocks estimates to be lowered.

"The largest deviation from market expectations was seen in the wheat complex," says Lisa Elliott, South Dakota State University Extension commodity marketing specialist. "2013 to 2014 wheat endings stocks were significantly lowered, and further than market expectations."

Elliott's report summary continues:

Wheat

Before the report, the average market estimate for 2013 to 2014 wheat ending stocks was 624 million bushels (Dow Jones). In the report, U.S. wheat ending stocks decreased by 83 million bushels, leaving estimated 2013 to 2014 ending stocks at 576 million bushels.

"This was due to exports being increased by 100 million bushels from the June report. This increase is due in part to recent purchases of soft red winter wheat made by China," she says.

China recently purchased 105 million bushels from the U.S., a large sale from a historical perspective.

"Current marketing year wheat commitments to China are almost five times greater than the amount China imported from the U.S. in the entire 2012-2013 marketing year," she says. "And we are only in the second month of the marketing year."

Coupled with the 2013 to 2014 decrease was an unexpected change to 2012 to 2013 ending stocks, which were decreased by 28 million bushels at 718 million bushels. This was a result of the feed/residual figure being increased to 388 million bushels. This would be the largest level of feed/residual use since 1998 when it was 400 million bushels.

From a world trade perspective, the report showed some significant global changes.

China's wheat imports were increased by 184 million bushels to 312 million bushels for the 2013 marketing year from the June report. This additional demand is from the domestic feed demand being increased by 184 million bushels to 919 million bushels. This additional demand will be met by imported wheat mainly from the U.S., Australia and Canada, according to the U.S. Department of Agriculture. In addition, ending stocks for world wheat were decreased substantially (by 326 million bushels) to 6.3 billion bushels from the June report. This should be supportive to wheat prices longer-term.

Corn

Prior to the report, market analysts expected 722 million bushels for 2012 to 2013 corn ending stocks (Dow Jones). In the report, the U.S. corn ending stocks level was estimated at 729 million bushels, a decrease of 40 million bushels from the June report. This change was the result of an increase in the feed/residual estimate.

"This adjustment was made due to the higher-than-expected corn usage in the third quarter of the marketing year as shown in the June grain stocks report," Elliott says.

Market participants expected 2013 to 2014 corn ending stocks at 1.87 billion bushels. The report revealed 2013 to 2014 corn ending stocks at 1.96 billion bushels, an increase of 10 million bushels from the June report.

"Thus, the change was in the opposite direction than expected by market analysts. Ending stocks were higher because USDA offset the reduced carry in from the 2012 to 2013 crop year and offset the reduced production from a reduction to expected harvested acres by 400,000 acres, by reducing feed and export demand for 2013 to 2014 by 50 million bushels each," she says.

Market outlook

The main implications to market prices implied by the WASDE report is the unexpected increase in wheat consumption and potential impact weather will have on production estimates for corn and soybeans, Elliott says.

"Along with China recently purchasing soft red winter wheat, we also saw a strong wheat export sales report. Coupling these indictors with the increase in the feed/residual figure for 2012 to 2013 points to the continued strong feed demand that the wheat complex is meeting to replace the decreased corn production we experienced during last year's drought," she says. "With high corn and soybean prices, and tight supplies, more livestock feeders have supplemented their rations with wheat."

Based on this report, Elliott says market participants will be closely monitoring weather conditions in the upcoming weeks.

"The peak in seasonal prices is typically exhibited before new crop supplies are available and will likely be extended further this year due to tight ending stocks levels coupled with soybeans and corn that were planted later than normal this year," she says.

Currently, there is carry in the wheat market, and continued strong feed demand may decrease the carry spread or improve the wheat to corn spread -- which is the ratio between Chicago wheat price and Chicago corn price.

The result, Elliott says, would be a decreasing incentive to store wheat.

"If weather conditions in the upcoming weeks turn unfavorable, we may see sharp increases in commodity prices, since carryover stocks, as a percentage of consumption, are historically low," she says.

"This places even more weight on weather conditions this year, as the market expects large corn and soybean production that would allow for larger carryover into 2014 to 2015," she says. "If U.S. corn and soybean production estimates are realized, we are likely to see basis levels retreat back to more normal basis patterns."

She says holding new crop corn and soybeans into December and January may yield a better price based on basis levels historically improving during that time.

"It is important for one to consider historical basis when developing a marketing strategy," Elliott says.

South Dakota regional historical and current basis information can be accessed on igrow.org/agronomy/profit-tips.